Blue chip stock Canadian National Railway Company is expanding and improving its infrastructure for global trade. The amount of cargo the company ships is expected by financial analyst Benoit Poirier of Desjardins Capital Markets to rise further—especially after the company improves its strategic ports on the Pacific Ocean.
After taking a tour of Canadian National Railway Company’s (TSX—CNR; NYSE—CNI) Prince Rupert, BC operations, analyst Benoit Poirier says that quite a bit has changed since Desjardins Capital Markets last checked things out there in June 2008.
CNR joined its supply chain partners in August 2017, the Port of Prince Rupert and DP World, in marking the 10th anniversary of the Fairview Container Terminal and celebrating the facility’s expansion.
The analyst acknowledges that he is impressed with how Prince Rupert has evolved and is confident that it offers CN an important competitive advantage. In fact, he says that the operations could, by 2025, lead to incremental revenue of up to $1.6 billion. This makes CN a Canadian stock to watch over the next few years.
“All key stakeholders highlighted Prince Rupert’s unique attributes: it is the closest North American port to Asia; it has the deepest natural harbour in North America; Prince Rupert is safe, sheltered and efficient access; and has superior and uncongested rail and road connection to North American markets,” says Mr. Poirier.
“Compared with 2006 when the port handled 7.7 million tonnes, of which 61 per cent came from grain, the port has grown nicely and handled 18.9 million tonnes in 2016. Interestingly, the business is more diversified, with bulk grain representing 32 per cent of total volume versus 29 per cent for containers and 16 per cent for coal. Looking to the future, the Prince Rupert Port Authority expects the port to grow, with the potential to reach 55 million tonnes in 2026.
“Key milestones include the recent opening of Fairview Terminal Expansion 2A, which will add up to 500,000 twenty-foot equivalent units (TEUs, a standard unit for measuring container freight), and the Ridley Island Propane Export Terminal, which is expected to add one million tonnes by 2019.”
Post-2020, key projects that will further propel the port’s future include: the Fairview Terminal Expansion 2B in 2022 with an additional one million TEUs; the Liquid Bulk Terminal with Vopak that is expected to contribute another 10 million tonnes by 2023; and South Kaien Breakbulk and General Cargo expansion that should contribute five million tonnes by 2023.
Mr. Poirier keeps his ‘hold’ recommendation and his 12-month target price of $106 per share.
As for the one-year target, he says that Desjardins is using the average of a 17 times price to earnings multiple on its adjusted earnings per share (EPS) for 2019; a 10.5 times enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) on its EBITDA projection for 2019; and a discounted cash flow value of $107.87.
“We believe CN remains a quality stock, with volume growth and operating performance that should continue to outperform versus its peers in 2017,” says Mr. Poirier. “That said, we believe these positives are already reflected in the current share price, as we foresee only nine per cent potential return to our target—based on our 2019 estimates. In addition, we see potential for only modest operational improvement in the coming years given CN’s best-in-class performance.”
Expect CN to have a long-term share-price gain and growing dividend. It has grown its dividends since 2014.
This is an edited version of an article that was originally published for subscribers in the October 20, 2017, issue of Investor’s Digest of Canada . You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada. 
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